India banks need $13.6b capital by March 2019

India’s banks will need Rs910 billion ($13.6 billion) in Tier-1 capital until March 2019 to grow at a bare minimum pace of 8 to 9 per cent on average, India Ratings and Research said on Wednesday.

Of the total capital needs, Rs500 billion will have to come from additional Tier-1 bonds, the rating agency, an affiliate of Fitch, said.

The Indian government, which owns majority in nearly two dozens lenders, has plans to inject Rs200 billion into those banks over the next two financial years beginning April.

Analysts have said the government will have to increase the capital injection significantly to keep some weak banks afloat as global Basel III banking rules are due to be fully implemented by March 2019.

India Ratings “believes there is an increasing divide between the large and smaller (state-run banks), with the former having some access to growth capital, better market valuation, and also some non-core assets to divest while the latter would only receive bailout capital if required,” the agency said.

India Ratings expects banks’ impaired assets to peak at 12.5-13 per cent by the next two financial year 2017-18 and 2018-19, which it projects to be at 12 per cent by the end of the current financial year 2016-17.

While sectors such as iron and steel and textiles have seen a fair bit of recognition, India Ratings said the provisioning might still not be adequate to protect against defaults.

Significant proportion of unrecognised stress pertains to sectors such as infrastructure, realty and capital goods, India Ratings said, adding that these sectors have long-term viable assets but increasingly need cash flow restructuring to avoid slippages as alternate refinancing is scarce.

The report expects the sector’s net interest margins (NIMs) to remain stable at 2.9 per cent for the financial year 2017-18, 15-20 basis points lower than the long-term average. It estimates demonetisation impact to benefit CASA ratio of state-run banks by 200-250 basis points by March 2017 compared to that a year ago.

The rating agency also maintained a ‘stable’ outlook on the non-bank finance companies (NBFC) for the financial year 2017-18.